GCC mulls big spending cuts to offset revenue loss over low oil

Over the past three months, GCC governments have announced various measures to offset at least a part of the large revenue losses that will likely result this year from the combination of sharply lower oil prices and, in most cases, lower oil production, according to top ratings agency Moody's Investors Service.


A vast majority of the measures announced so far have been on the expenditure side, reflecting the simultaneous shock to the nonoil economy from the coronavirus pandemic and governments' desires not to place an additional burden on the productive sectors through new or higher taxes and fees, it stated.


Moody's had recently revised down its average oil price assumptions to $35/barrel in 2020 and

$45/barrel in 2021, and as a result, it expects a very large drop in fiscal revenues for all GCC sovereigns.


While GCC sovereigns have provided some targeted support to buffer the economy against the coronavirus shock, most have enacted consolidation measures that significantly exceed

the cost of fiscal stimulus with the aim of offsetting expected revenue losses, it stated in the report.


The differences in policy response are, to a degree, proportional to the sovereigns' exposure to

the shock, but are ultimately a reflection of differences in their institutions and governance

strength (fiscal policy effectiveness in particular), which captures their adjustment capacity

and indicates how durably lower oil prices are likely to impact their sovereign credit profiles, it added.


The top ratings agency pointed out that large fiscal adjustments planned by Abu Dhabi (Aa2 stable) and Saudi Arabia (A1 negative) is likely to allow a preservation of their fiscal strength despite the lower oil price environment.


On the other hand, Oman (Ba2 RUR-), Bahrain (B2 stable) and Kuwait (Aa2 RUR-) is expected to see a deterioration in its fiscal strength, although Kuwait’s very large sovereign wealth fund assets potentially provide a significant buffer. 


Moody's said spending cuts announced so far include a large one planned by Abu Dhabi, which  will amount to around 10% of GDP and likely centre on current spending and reductions in overseas grants and aid payments, as well as a reduction in spending on behalf of the Federal government, which includes military and security outlays that Abu Dhabi keeps on its own balance sheet. 


"We expect the government to target these items because they are likely to have a more modest impact on domestic non-oil economic activity, which was contracting even prior to the coronavirus outbreak in 2019," it added.


Saudi Arabia has also announced large spending cuts over the past three months. 


As per Moody's estimate the total cut relative to the 2019 budget outcome (which includes an expenditure reduction planned in the approved 2020 budget), will amount to around 7.5% of GDP, although up to two percentage points of these savings will likely be offset by higher coronavirus-related healthcare and social spending, thus reducing the net spending cut to around 5.5% of GDP.


On the moves made by the other Gulf nations, Moody's said Qatar (Aa3 stable) and Oman have announced somewhat more modest spending cuts so far, amounting to around 4%-5% of GDP. 


In Oman, the government announced and began to implement a 10% cut to its non-interest spending (excluding outlays related to oil and gas production activities). In Qatar, cuts include a large reduction in non-priority capital expenditures, which the government had announced in early March. 


It also includes a more recently announced plan to reduce the salaries of expatriates employed in the government sector by 30%, which, as per Moody's estimate, could reduce spending by close to 1% of GDP on an annual basis.


By contrast, Bahrain and Kuwait have announced very little so far, reflecting a politically more complex governance structure, particularly in Kuwait where the relatively more powerful parliament, compared with the rest of the GCC, has been a long-standing obstacle to implementing fiscal consolidation measures, noted the top ratings agency.


In May, Bahrain announced that it would cut current spending excluding wages and transfers by around 30%. "Although, at least on the surface, this appears to be a large adjustment, we estimate that it will only produce around 1.5% of GDP in savings because it does not apply to wages, which constitute around 40% of all on-budget spending," it stated.


Nevertheless, Bahrain's policy response is still more significant than that of Kuwait, which has so far announced no new significant fiscal consolidation measures. 


This is in part because the government has effectively been in a state of shutdown since the coronavirus outbreak began in March, with parliament only reconvening in mid-June. 


Nonetheless, the government's track record of implementing new fiscal consolidation measures in response to lower oil prices since 2015 has been the weakest among GCC sovereigns.-TradeArabia News Service


Source: http://www.tradearabia.com/news/BANK_369291.html


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